Lawyers' professional liability is not a niche for a fast buck

(The following is based on comments Stuart Pattison, CNA Pro Open Brokerage, New York, delivered at the annual convention of the Professional Liability Underwriting Society, which was held last fall in Chicago. Pattison, a vice president at CNA Pro Open Brokerage, took part in the same panel discussion on lawyers professional liability insurance that Ms. Dickey did.) After I was asked to speak about lawyers professional liability insurance, I tried to see if I could identify a carrier that for the last 20 years continuously has underwritten this class of business successfully–and I couldn't. So I thought I would try to identify the mistakes that underwriters have made.
But the first question really is, “Why write this line of business?” Certainly, carriers get into different classes of business from time to time. But if the sole reason for entering the lawyers professional liability market is because you're losing money in other lines, I don't think that's sufficient. In fact, it could be a recipe for disaster.
It's also a mistake to plan to be in this line for just a short period. The problem is guessing which year is going to be profitable. While the history may look good at any given time, that doesn't necessarily mean the risks have improved. In fact, the opposite could be true. A major barrier for short-term players is that law firms and the brokers who represent them are biased toward carriers that are already in the market. Law firms prefer to be involved in long-term relationships. They'd rather have them mirror the relationships they would like to have with their own clients.
Another thing to anticipate is the necessity to pay a full-limits loss. At some point, it is quite likely an insurer in this market will have one.
If you want to be involved with a predictable, non-volatile line of business, you probably should look elsewhere. There certainly have been years when we've seen large systemic losses in this niche. Twenty years ago, for example, many law firms that had savings and loan institutions as clients were caught up in the S&L debacle, and there were some huge lawyers professional liability losses. From 1999 to 2002, we had–if you will–the “perfect legal malpractice storm.” It arose from a combination of tax shelter claims and the collapses of major corporations like Enron and WorldCom. The loss ratios of most carriers that insured affected law firms were 200% to 300%. Current loss ratios are certainly far better. But one problem you find with lawyers professional liability insurance today is that we're “betting on the tail.” Who knows what losses ultimately will be on this year's business? After all, we're still paying or putting reserves on cases from 2001.
Another basic principle, which I think some carriers have ignored, is that you need to have a fairly broad spread of risk. While you can never tell which firms will have a loss, you can certainly determine the propensity. But underwriters who think they can predict which firms are going to have a loss are fooling themselves, because the reality is that you simply never know. The best-run firm in the world could have a total loss.
You also need experienced claims people, and you need to be able to articulate why a law firm should be insured by you. Law firms ask searching questions. They deal with a number of underwriters, so they will certainly have their questions ready for you.